Vīta Brevis, Wit Artefāctōrum Ætērna Podcast

Ash Stuart
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Exploring innovation, progress and achievement: a first-principles approach to everything that matters; combining history, epistemology, economics, anthropology, geopolitics, finance, philology, etymology and more... for, life is short, knowledge forever. ashstuart.substack.com

  1. 4d ago

    The Story of Money: The Conundrum of Coin Debasement

    We traced in Episode 031 the emergence of gold and silver as ‘pure’ and ‘noble’ metals perfectly suited to serve our economic needs in the form of money, and then in Episode 032 their comparative importance and finally in Episode 033 how money took shape - in the form of coins. Remember the final words in that piece? “What could go wrong?” And oh boy wrong it did go so many times, and sometimes so spectacularly, that you’d think it was farce, vaudeville and tragedy rolled into one! In this piece, I’ll briefly touch upon the broad forces and phenomena at play in this context, but we will definitely come back with specific stories from specific events in history. With the advent of coinage, the issuance of a standard specie - ie, with a certain fixed size and weight, by the king or state meant that the unit of measure of value was now fixed and established as uniform. The implicit understanding was that if the coins were melted down and sold in the market, it would be worth the same as if the coins were spent, they would both fetch, say, 10 sacks of grain. In other words, the face value of the coin is the same as its value by weight. And then the fun begins! A Clippery Slope Let’s say I’m looking at a shiny new silver coin and it says “One Denarius” on it, so I can be sure of buying that much by face value. Now what if I chip or shave off a small portion of the edge of the coin - which is not that hard given silver is not that hard, what if I do this for a 100 such coins, even a 1000. Now I have all these clippings I can melt and voila, I have new money! As the Dire Straits didn’t sing: money for nothing and chips for free! Apart from this method, which is called clipping, there were other ones, but the idea was the same, leech off a small, seemingly imperceptible quantity of the metal from each coin while also trying to pass off the counterfeited coin as if it were the real thing. Incidentally, coin-clipping as a problem is attributed to have been solved by our good friend the Master of the Mint at Britain’s Royal Mint we met back in episode 032 - yes, Isaac Newton! The legacy still stands even though we don’t engage in clipping - ridges, reeds or grooves you see around the side of a coin, the process being called reeding or milling. And needless to say kings and states came down heavily on individuals engaging in such debasing of coins. But was it only the ordinary people who did such stuff? An Alloyed Bad Oh no! Coin debasement gets even spicier when the king himself got down to it. Not by clipping mind you, but let’s look into how. Issuing coinage has a cost, obviously the metal being used, plus the process of minting the coins, the labor thereof etc. So I’m sitting on my throne, I have these ‘One Denarius’ coins of silver serving the economy, but hold on, I have a brilliant idea (or a cunning plan if you watch the comedy Black Adder, very apt for the current context!) For the next batch I’m going to print, why don’t I use a tiny bit of copper, like about 5% of the weight that goes into the minting process. I mean, nobody will know right? My subjects aren’t that smart, even if a few are, it’ll still look the same to most of them? What could go wrong? Face of Base And to that refrain, we can add another one - and where will it all end? Because, spoiler alert, it always ended in tragedy. In a system where the face value of a coin is understood by everyone to be the same as the intrinsic value of the weight of the coin, it’s not hard to see how detrimental this is - and this was very tempting for kings and governments, because when done in seemingly small measures of adulteration, they could hope to get away with it. But if you’ve done it once why not do it again, with a bit more of the cheaper metal? Eventually people will find out, the coins will mean much less, people will trust them much less, but the king saved some of the actual precious metal he could by then have used elsewhere. Like, for example, there was also the time-lag factor, between a new batch of debased coins issued -- say there was a war and the king wanted more money, as there always was and kings always did: by the time the debased money entered the wider economy, and the detrimental effects rippled through, the king had gotten away with that metal he saved and used elsewhere. And despite my example of the Roman denarius, this happened across cultures and territories. Gresham’s law, which we explored in Episode 32, that bad money drives out good money, inevitably kicked in: if you had some good pristine older coins and some dodgy looking newer ones, which one would you spend and which ones melt or hoard? So yes, debasement of coins meant the debasement of money, disruption of trade, erosion of trust in the state, but somehow it was as ubiquitous as money itself. Today, we don’t use money in the same way, our coins by definition do not match the intrinsic value of the metal used. But there is one other specter of the debasement of money, whether material or otherwise, that still haunts us today. And that we shall explore next! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  2. Oct 2

    The Story of Money: The Origins of the Coin

    Over the last couple of episodes we’ve explored the use of gold and silver as money and the tussle between the two. Let’s now get to the question of ‘form factor’: To appreciate the value of coins, something we’re so used to and thus take for granted, we have to position ourselves to the earlier reality. We have a broad idea that from the earliest time that communities traded widely, they simply exchanged goods with each other - barter. I’ve discussed aspects of this in some of the earliest episodes. From there on, as we traced in Episode 031, with gold and silver emerging as useful means to represent value by weight of either metal, the practice of carrying out trade using ingots or bullions - pieces of the metal, arose. Think of it as chocolate or soap bars - in the former case, it may even have functioned as money on the playground back when you were a kid in school! Except that these were made of metal, cast into similar moulds as these more familiar objects are. (Just ask Charlie Bucket or Willy Wonka!) But this presented a few problems. Firstly, these metal bars were bulky. And then they were typically worth way more than could be used for normal goods on a general basis. (Let’s call it the rich man’s cash?) Also, given the potential for adulteration of these metal bars with inferior metals, each load of metal had to be weighed every time to assess their purity. All Loads Lead to Lydia Enter Lydia! A wealthy and prosperous kingdom in Western Anatolia, around the years 600 before our era. Located at the crossroads of a growing Greece to the west, Egypt to the south, and the Persians to the east (and even some Central Asian groups in the north), Lydia was very well placed as a trade corridor leading to the said prosperity. It was here that a certain king Alyattes is attributed to have taken a more systematic approach to the whole affair: mint a circular piece with specific images on both sides, sort of like simple medals. These early coins were made of electrum, an alloy of gold and silver, abundantly available in the rivers of the region. The Point of Crisis But the relative quantities of gold and silver in these electrum coins varied, sort of recreating a similar problem as we saw in the previous episode but in alloy form! Practically, it was hard to assess the exact value of any given coin. The next breakthrough is attributed to his successor, king Croesus, yes he who still lives on in our idiom “as rich as Croesus”! His primary innovation was to switch to issuing coins in standardized pure gold or pure silver, around the year 550 BCE. In fact, he is said to be the inventor of the world’s first bimetallic system. To Coin a New Phase So yes, Croesus’s innovation we may say helped him become, well, as rich as Croesus! But let’s explore how revolutionary it was at the time. The idea of coins, and their use, quickly spread across the wider region, with polities such as the Greek states and soon the Persians adopting them rapidly, marking a new phase in the history of money. Coins were significantly more useful than the older ways - unlike the previous, somewhat grassroots and voluntary methods, coins were issued by the state, you may say money was nationalized. Why did this matter? For one, it meant, there was a standard, and the standard was backed by the authority of the state. This meant it solved the problem of independent verification, which was as we saw a huge barrier to trade. As we can imagine -- and even though some of the early coins were still too valuable to fetch a loaf of bread, they were lighter, more portable and eventually more granular in allowing for the measure of value of a greater variety of goods. In the tailoring analogy I’ve taken a few times previously in this series, imagine that tailors used to measure cloth simply by their fingers and hands - Croesus gave them a proper, standard measuring tape to use instead! Thus trade velocity increased significantly perhaps with many more people, at least other kings, also becoming as rich as Croesus. As for the original rich kid, well Lydia was conquered by Cyrus king of the Persians within his lifetime, with history leaving no clues as to his ultimate fate, and consigning a once prosperous and expanding kingdom right at the center of the old world to but a footnote in the history books. I mean, how many of us have heard of Lydia? Still, even in obscurity, Lydia’s invention conquered the world. Coins survived the advent of paper money, and, in our swipe-and-go plastic payments age, we still don’t toss a credit card in the air to decide heads or tails - we may still prefer to reach out to our pockets for a coin! So the Lydians gave us, as we’ve seen, this pure, pristine and standard way of measuring money, made of shiny gold or silver. What could go wrong eh? Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  3. Sep 25

    The Story of Money: Gold? Or Silver?

    We established in the previous episode that two metals emerged across history and across cultures as the most suitable units of measuring value, ie, money. As promised there, let’s now look at the tussle between the two. Quite simply, silver is much cheaper than gold - given the dynamics of their availability for us to extract, and thus the relative scarcity of each. Even though we don’t these days trade in gold and silver, this is something we broadly recognize. Because of this, gold has generally enjoyed greater prestige, being used much more in jewelry and as a display of one’s wealth and status. Correspondingly, silver has had more value as a practical day-to-day transaction choice. (You may have been born with a silver spoon in your mouth but you soon grew up to flaunt your gold!) But yes, how much was the relative value of gold and silver? This of course varied over time, there being often other factors at play, but primarily it went back to the relative availability. But as, within a given society, the relative availability could vary, there was this constant game of trying to take advantage of the variation. The Good, The Bad, The Shifty To understand this, let me first mention what’s known in the field as Gresham’s law, which quite simply states that “bad money drives out good money”. Let’s say you have 10 coins of either metal, which can buy you certain amount of goods in the market. Now if you melt those coins, the bullion (or ingots or whatever way you’ve shaped them) has the same value as the face value of the coins. That’s good money. On the other hand, if the melted metal is valued less than the face value imprinted on the coins, then you have bad money. It’s not hard to see how tempting it can be for governments to issue ‘bad money’, it means it would cost them less to mint those coins - this topic, debasement is juicy on its own, so I’ll reserve it for an episode in the near future. Under the same logic, governments would never want to denominate coins at face value lower than commodity value. Because what would you do if the face value of those 10 coins were lower than their price in weight? You’d melt them, you’d hoard them, these coins would disappear from circulation. Now let’s take a real-world historical example of one case of how this panned out specifically in the battle between the two metals - there are several such cases, but we have to pick one. Elements of Surprise In 1717, the ‘Master of the Mint’ in Royal Mint, Britain’s official coin-issuer, made a fateful move. He set the price of roughly one part of gold to 15 parts of silver. (I’m quoting rough figures here to keep the math simple.) However, in Continental Europe, it cost 14.5 parts of silver to buy one part of gold. Again, let’s see how this works out. Essentially what this meant was gold was artificially overvalued by the Mint relative to silver, whereas on the Continent, silver fetched more gold. So what would I do, I’d scoop up all the silver I could get hold of, make a trip across the English Channel, and, given silver buys more there and gold is cheaper, buy up all the gold I could for my silver and bring that gold back to Britain. What would I do once I’m back home? (After having a cup a tea, of course!) I’d buy up all the silver I can for that gold, because, that gold buys more silver in jolly old Blighty! And then... time for another trip to the Continent (Only delayed if the weather report reads “Fog in the Channel, Continent cut off”) The consequence of this was that soon all the silver disappeared from Britain, and a lot of gold flowed in, inadvertently pushing Britain, with eventually wider consequences beyond the island, onto a de facto gold standard! We would wonder who the hell was this guy who couldn’t even calculate the relative worths of gold and silver? Well, it was none other than Sir Isaac Newton! Yes, Newton! I mean, in the midst of writing his great work that essentially defined modern physics, we can say he took a break to invent a new branch of mathematics, Calculus, because the existing system didn’t allow him adequate expressiveness and precision! Unbeknownst to most of us, Newton in fact had his finger in many different pies, and in the latter years of his life he took on this role at the Mint as mentioned. To be fair to the great master, he did point out the problem, but the government did not bother to fix it, presumably underestimating the power of Gresham’s law. Furthermore, for Newton’s own legacy, the yet other element of irony is that, and again this may surprise many, he spent many years of his life trying to crack alchemy -- which was typically the attempt to turn lead to gold, he was essentially obsessed with alchemy. While the promise of alchemy was elusive to him as to anyone else, did he end up in real life with some sort of mathematical alchemy ‘turning silver to gold’? So yes, economics, as an intersection of mathematics and human psychology has its ways! The man who described the laws of physics couldn’t defy the physics of money, Newton defined gravity but could not defeat Gresham! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * Documentary - Newton’s Dark Secrets - Nova This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  4. Sep 18

    The Story of Money: Why Gold?

    It’s perhaps one of the most obvious and well-known things in human life - that gold and silver are or at least were used as money. But let’s step back and see how and why this happened. I have reiterated a few times in this series that money has no intrinsic value, it’s just a measure of value. And we generally know that across history and cultures, other objects other than metal and paper have been used as money at one time or another. However, there’s something special about the use of gold and silver as money. The Good Gold Days Back in TecC 14 I discussed the origins of humans figuring out the non-obvious and high-temperature process of extracting metal from ores and even combining them, with the rest of that decimile exploring the social and historical impacts specifically of bronze (copper + tin) until TecC 20 and then again in TecC 22 with iron followed by another similar exploration of its effects - we call those periods the Bronze Age and Iron Age respectively, the key point being that these metals and alloys have come to define entire technological-historical epochs. But we don’t talk about a ‘Gold Age’ or a ‘Silver Age’ - not literally, largely only figuratively. Gold and silver have been known to mankind from much earlier in human timespan than tin and iron and other metals - there have been great civilizations that extensively used gold or silver that never got to bronze or iron - the Aztecs for example. Quite simply gold and silver offer many of the same advantages being also metals, as I’ve discussed at length in the stated articles. But they offer more. Gold and silver are ‘Noble’ metals - they are resistant to corrosion and are thus found in pure state in nature as opposed to as ores - in combined form requiring the extensive metallurgy suggested. That said, they are very rare and its not easy to find gold. And that is the key. Slow and Steady We have seen, for example when discussing money supply, that there can be problems if there is too much or too little money in circulation in the economy. The relative difficulty of mining gold and silver thus introduce that much required scarcity factor. Furthermore it can also add to stability, since, with the exception mainly of extensive explorations such as in the mid 1500s by Europeans beyond the Atlantic, the supply of gold and silver would largely remain a constant and change only gradually. So you’ve got two metals - easily shapeable into different shapes, resistant to corrosion and hence to destruction or decay, durable, scarce and stable, and finally with the cherry-on-top quality of being shiny and attractive. What’s not to like eh? A Silver Bullet of Solid Gold So even if a society started off with cowrie shells or pebblestones, there was a good chance that many of them ended up with gold or silver as their eventual choice of money. In fact, this is an important point - we have seen that other technologies that we now take widely for granted given their ubiquitous presence in our lives, the wheel, zero, paper all more or less emerged in only one culture in each case. But the use of gold and silver as money emerged independently across different unconnected cultures and across time. So while the stronger metals such as bronze and especially iron found their way into weapons and machines, gold and silver, apart from extensive use in jewelry, found a unique position in allowing for the measure of value, as money. And given they could emerge independently across different cultures, it’s not hard to see how they became acceptable as a means of cross-border and long-distance trade, even between societies that otherwise might not have trusted each other. They thus became an integral part of our history and society. Our languages are plentiful with figurative uses of ‘gold’ and ‘silver’, one may have a silver tongue, one may be born with a silver spoon, but there’s always a silver lining; we have fool’s gold, you may or may not be sitting on a pot of gold, but you have a heart of gold! (Of course you do, you’re reading my work!) (And if we dig through the history of language, we have a great many words in our languages related to ‘gold’ deriving from the same Proto-Indo-European word ‘ǵʰelh₃-’ meaning “gleam, yellow, even green!”: Polish ‘złoty’, Sanskrit ‘hari’ “greenish-yellow”, Slavic ‘zelen-’ “green”, Greek ‘khloro-’ hence our ‘chloro-’, and also the name ‘Khloe’, and, among others, ‘gold’ and ‘yellow’!) And finally, given how attractive it can be, there have been salutary warnings in history and lore about excessive addiction to gold and silver - we all know how king Midas ended up! Still, and despite my general insistence that money has no intrinsic value, gold and silver have something going for it that defies it? They have a sort of inscrutable ‘value’ in a unique way we can’t fully put our finger on? And then, although I started off this piece by asking ‘Why Gold?’, we’ve been talking about gold and silver. But then, the question arises: gold? or silver? And that we shall explore next! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * The Story of Bronze: TecC 14 - Blending Forces, Breeding Innovation * The Story of Iron: TecC 22 - Renewing Resolve, Stealing the March This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  5. Sep 11

    The Story of Money: Meeting Maslow

    So far we have been talking mainly about the basics of economics (and finance). Let’s today, as it were, take things up a notch. A brief detour into our fictional world: remember back in Episode 006 the one about risk, where Steve had a failed harvest the previous season and was staring down the abyss of starvation. When Bryan, Brenda and Irene are sat with Steve discussing the predicament, imagine Bryan was like, hey Steve, there is this very prestigious horseracing tournament in town in two weeks’ time and I’m told the Premium tickets offer spectacular views of the events, plus that’ll put us very close to the Duke himself. It’ll be a fun week of partying. How about you and I both buy tickets and go check it out?! From Thoughts to Sentiments I’d safely bet that the ridiculousness of such a proposition by Bryan would be obvious to most of us. It was American psychologist Abraham Maslow who built a neat framework around human needs, which we will explore today. Now, Maslow as hinted worked in the field of psychology, so why bring him up here? I suppose we can see that the question of needs gives his work relevance from an economics perspective as well. And as we saw about the Father of Economics Adam Smith’s own preferences and perspective (Episode 020), and as I hope I’ve demonstrated now and then, the ultimate goal of economics can be described as wanting to improve the human condition within our environment. From Needs to Wants to Worth Put simply, in his ‘hierarchy of needs’ later depicted as Maslow’s Pyramid, he proposed that human motivation can be driven by five distinct sets of needs. These sets can be named physiological, safety, love & belonging, esteem and finally self-actualization, depicted in that pyramid from bottom to top in that order. The core point here is that if we are at the bottom of the pyramid, preoccupied with physiological needs such as food and shelter, we have or can afford very little attention for the higher needs. It’s only once we have fulfilled that set of needs can we adequately focus on the next set higher up the hierarchy and so on. Thus our hierarchy of needs progresses from the most basic to what may be termed ‘growth’ needs. Therefore one cannot afford to focus on the ‘esteem’ level with elements in it like confidence, respectability, status, or the ‘self-actualization’ one at the top with questions of morality, creativity, spontaneity and such if they’re still scrambling to put dinner on the table for the day. From Sentiments to Concepts This concept is in fact applied in a few different areas of modern life. We’ve all seen billboards of that smiling blissfully happy couple in an ad for a car or, hmm, a kitchen tap/faucet, or a bar of chocolate. They’re in a sense fooling you into thinking you’re buying a ticket to the next stage of Maslow’s hierarchy. In organizations, apart from a well-stocked vending machine and varieties of tea and coffee, these days there are pool tables, discounted gym memberships, what not. (”We can’t pay you more, but here’s a ping pong table, please feel actualized”) So yes, fields such as marketing & advertising, and HR and management have applied such ideas, by some measures at least, quite effectively (or we may take a cynical view, quite cunningly!) But I’d reiterate that Maslow’s pyramid has greater relevance than has generally been appreciated within the area of economics, especially when viewed broadly from the stated goal of human well-being. Let’s go back to the fictional story we started with. In the event, in that episode, thanks to Brenda and Irene’s suggestions, Bryan offers Steve 10 sacks of grain from his own grain from his bumper harvest, against collateral, should the harvest fail again -- as fully set out there, as part of risk management, a key component of economics. Similarly, a great many other concepts we have explored or will do, such as but not limited to debt, opportunity cost, delayed gratification, scarcity, investment, can all be very useful when combined with the Maslow perspective of viewing the human condition. From Concepts to Deeds? Let’s one last time take the example of someone unsure of the next meal, this time not in the cozy confines of remote fiction, but in the visceral reality of today here and now, of someone who’s lived such a life of subsistence all one’s life, even if most of us who can afford to read this might never have had to confront such a situation. Some of the concepts we have covered, with the underlying premise being that it’s useful to improve one’s own lot, such as delayed gratification, investment and so on might not even be accessible to such a person, because they are essentially at a much lower level in the Maslow hierarchy. So how is one to overcome the trap of such a hand-to-mouth existence in the first place to be able to ascend the pyramid? We have the luxury of learning and applying these useful economic concepts in a way they don’t? Practically what needs to be done by way of external facilitation, either by society or government? Perhaps this responsibility falls on those of us much higher up the Maslow pyramid? Are we sensitive enough to the plight of those lower than us in this hierarchy? It’s for each of us to ask these questions and answer them ourselves. For my part I hope I’ve given some useful economic and intellectual tools to use in the improvement of the human condition, whether our own or that of others. Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * The Theory of Moral Sentiments, Adam Smith This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  6. Sep 4

    The Story of Money: The Great Crash of 1929

    Last time we looked at the phenomenon of supposedly ‘rational’ behavior leading to wild aggregate market outcomes. Let’s now look at what’s arguably the most spectacular and devastating real-world example of this. For, even as the 20s in this article series come to an end at 029, we shall trace how the Roaring Twenties ended with this extraordinary crash in 1929! We won’t be featuring our fictional friends on this topic, the real-world characters involved here, as we shall meet in due course, themselves go beyond what fiction could conceive. And there’s a lot of ground to cover! Let’s first set the historical stage to provide enough context. After the First World War, the United States was set on the road of massive economic expansion, in good part thanks to the rapid growth of electrification and thus the manufacture of electrical appliances and related goods. This rapid expansion in industrial manufacturing with a large number of such goods entering the market meant that the purchasing power, or at least the purchasing intent, of the public at large had to grow. Thus eventually emerged the concept of consumer credit, where organizations would lend money to people wanting to buy such goods, and on the cheap - you could get a loan of 100 dollars by just putting up 10 dollars as initial payment! However, given the interest rates were very low, meaning you got very low yield for your cash sitting in a bank’s savings account, people starting using such loans to buy stocks and shares in the booming industry - also a relatively new phenomenon for most people. Just as we saw with the Tulip Mania in the previous episode, all this led to asset prices only going up and people becoming complacent in expecting that it would keep going up forever (Now, where have we heard of that in our own lifetime?!) Humpty Dumpty sat on Wall Street And then it all came crashing down, because just as we think the prices of such assets will keep going up and up, once that bubble burst, as it always eventually does, the sentiment goes right into reverse - everyone wants to sell of theirs before others do, leading to a free fall of the prices. Fundamentally, there were structural weaknesses in the economy that were masked by the exuberance. Importantly the agricultural sector hadn’t been doing well all this while but most folk in the cities and towns were busy enjoying the party! Also, despite all the industrial expansion, actual wage growth was low, but then again, the cheap credit phenomenon served to obscure that anomaly. The major turning point came when Benjamin Strong, a very astute and influential banker heading the Federal Reserve Bank (of New York) died in 1928 leaving a massive intellectual vacuum and even paralysis at the Fed. And then the music stopped. There had been minor panics prior to the main historic crash but the market managed to brush it off. There had been siren voices warning that things had gone too far and there was a massive speculative bubble that would burst any time, but they were promptly ignored. Until they could be ignored no more! The two dates etched in historical memory would be Black Thursday, October 24, 1929 and Black Tuesday the following week. There’s a lot of gory, or if you prefer juicy, detail about what ensued, all good enough to read in a thriller novel but you wouldn’t want to be there. On Black Thursday, within the first 3 minutes 3 million shares are said to have changed hands. The selloff was so intense that the ticker-tape... the printed paper tape that displayed prices simply couldn’t keep up and was delayed by hours resulting in total chaos. But Black Tuesday is seen as the worst day - about 16 million shares were traded and the index fell 12%. Dealing with It All This account barely scratches the surface of what happened - both the bubble and the crash. It took the authorities 3-4 years to even grapple with the situation, especially given the then president Herbert Hoover didn’t think it was for the government to intervene - the decisive changes came only with the election of a new administration under Franklin D Roosevelt in 1933 - the New Deal, which we will have a lot to say about in due course. We all have black-and-white images of those long breadlines, there’s even this picture I once saw of this now-former banker with a placard offering to sell his rather fancy car for.. food or similar! All of this is in quite stark contrast to the good times - both the economic prosperity and the cultural dynamism that accompanied it. The crash would lead to the Great Depression in the US and much worse in continental Europe, with the tide turning only by 1945. The regulatory changes in response to the crash were massive. Previously the New York stock exchange, for example, operated on its own, and as we saw any member of the public was able to participate in the trading even if they knew almost nothing of the intricate details of such activity. The Federal Reserve was not the same centralized national institution it later became, it was fragmented and as we’ll see in detail another time, shackled in some rather dangerous economic dogma that only poured fuel to the fire. The easy line to take here is “those greedy bankers”, or “our corrupt politicians”, but if we take a more honest look, the public at large were happy to partake not just of the prosperity but the excesses of speculative trading as well? As we saw with the Dutch Tulip Mania and this episode, when things are going well, very few people want to pause to think about fundamental flaws in the system? There are many lessons from these events in the 1920s and the aftermath. How many of those lessons have governments and indeed the public learned? And how many of them conveniently forgotten or put aside when the ‘good times’ come back? Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  7. Aug 28

    The Story of Money: The Irrationality of Rational Action

    A key thread running through all my writing in this series is how each of these topics, and how economics as a whole, relate to each of us, here and now. So let’s today tackle the question of how human behavior impacts markets and how that impacts each of us back. The key tension here, as I’ve noted before, is that economics tries to be a precise science while seeking to describe messy human reality. In this spirit, economics, or at least some branches of it, have posited that humans are rational - not in the sense that we normally understand that term, but in the sense that they behave in ‘economically optimal’ ways, given that particular branch’s definition of optimal. There is even a term for this: homo economicus. Under this line of thinking, it is said that one rationally carries out a cost/benefit analysis of every action prior to a decision. (Mind you, this needn’t be with a spreadsheet and 3 pie charts, it could be intuitively and even inexplicably.) In practical terms this is said to mean that as consumers/producers we seek to maximize utility/profit. (For a more precise and unadulterated definition of the oft-misunderstood word ‘profit’ see Episode 004.) Weighing Wants To get to the heart of this, we have to look closer at the term value, which I introduced in the aforesaid episode, and have discussed elsewhere in this series. Specifically we have to consider perceived value, a fundamentally subjective concept. As an example, when we discussed price in Episode 003 we saw how it’s a sort of ‘negotiation’ between the buyer and seller. In the current terminology we’d say they’re each seeking to maximize their utility/profit, ie, they’re being rational. This could depend on several factors, including, for example, supply and demand which we discussed in Episode 017 but ultimately if something is subjective, how do we pin it down with precision? How do we put a number to it? Furthermore, how do we satisfactorily explain or predict such perceptions of value among individual actors in the economy? For we have also seen, as I’ve noted previously, if we can’t measure something do we even know it well enough? All this goes to the very tension of economics I was referring to. In Fool Bloom So far we have considered the question of a single entity, but let’s see how this pans out in aggregate. Imagine it’s 1600s Europe, the early age of exploration, and an exotic and rare new flower is introduced into a country. Instantly, it becomes a status symbol for the rich and everyone’s after them - the price of the flower skyrockets, so much so that at its peak, one variety of the flower is sold for several times the salary of a skilled craftsman! If you think this is contrived it’s not, this actually happened in the 1630s in the Dutch Republic, then undergoing the Dutch Golden Age - the Tulip Mania. It may be irrational, in our normal sense, for a buyer to be rational (an alcoholic seeking to buy more alcohol and thus find more ‘utility’?) but if this is scattered about among individuals here and there it’s one thing. But we can see what happens when everyone joins the bandwagon of this irrationally rational behavior, such as in the Tulip Mania mentioned. If tulips can be sold at such exorbitant prices as hinted, why would anyone be incentivized to grow wheat or other essential crop? Given that buyers are valuing, and thus paying, more for a shiny new flower than food? But how does that perceived value of the rational actor square with the real and proper value lost in the economy as a whole, and ever in the long term, by such collective irrational exuberance? So the price of the given asset-in-obsession goes up and up and up - and the more it goes up the more people think it’ll go up, and so well, ‘rationally’ they buy it up, and the more it goes up! This is what is called a bubble. But how long and how big can we go on inflating a bubble? What happens when the music stops? And that is exactly what we will explore next time: arguably the mother of all crashes in financial history! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * The Intelligent Investor, Benjamin Graham - read from the very “Father of value investing” This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

  8. Aug 21

    The Story of Money: The Rabbit Hole of Money Creation

    Back in the day when I worked in banking, in a workshop the presenter asked “What do banks do?”, and I said “they make money”, to which his reply was “of course every institution needs its earnings”. But that’s not what I meant. Let’s today discuss the concept of money creation. Let’s meet our fictional friends to start with. Steve and Bryan have been in the silversmith and pawn-brokerage business for some time now. In recent days however, having gained the reputation of the town, they have found a way to extend their activities. The townsfolk are tired of having to carry around silver for all the payments, and as the only shop in town dealing with large amounts of silver, Steve and Bryan have offered to let customers deposit their silver in their vault in exchange for a written and signed note representing the amount deposited. Since that note represents a certified quantity of silver, the depositor can then use that note instead of actual silver on a day-to-day basis. Given Steve and Bryan are trusted people around, their promise on the note is enough to satisfy the depositor that any time they want their silver back, they can simply return the note for the amount. One weekend after a couple of weeks of such activity, Steve and Bryan are sat in the garden with Brenda and Irene and having a chat. Steve is like, so yeah we have all this silver sitting in our vault, Bryan adding, but the curious thing is nobody has come to claim their silver back even though we gave them a written promise. Brenda chimes in, well given that you’ve mentioned the amount of silver on each note, and anyone can use any note to come back to claim the silver at any time, they’re not in a hurry, after all it’s easier to handle such notes rather than heavy sacks of silver. Irene then goes, but wait, if you are sitting on all this silver, and they won’t come back to claim any of it because it’s easier to handle the notes, maybe you shouldn’t leave the silver idle, you should maybe lend some of it out? In Gold We Trust, But... So yes, that’s the birth of paper money. (And Steve and Bryan were the proto-Goldman Sachs? Or is it Silverman Sacks?!) But if you look closely something else is happening here. Imagine our friends have a thousand pounds by weight in silver in deposit, against which they have given out those notes representing a thousand pounds. And then, going by Brenda and Irene’s observation, they lend out a 100 pounds of the silver, to other people who need money. That silver goes into the economy and... you guessed it, someone along the line deposits that silver back into the vault in return for notes promising 100 pounds of silver. So now, we have 1100 pounds in the economy -- against ONLY a thousand real pounds of silver. This may sound like jiggery-pokery, but this is practically what EVERY bank does when lending you out money. Economists even give it a respectable-sounding name - Fractional Reserve Banking. In other words, only a fraction of the gold or silver representing the issued paper money is actually in the vault at any time. And guess what, governments are fine with it. Based on the state of the economy and other factors, governments have even encouraged banks to engage in such activity. You will recognize this from the following sentence on many currency notes: I promise to pay the bearer the sum of 10 pounds (or whatever other original indicator of weight, such as peso, libra/lira etc.) And different forms of this have had different names across history: in some versions, a bill of exchange, a promissory note, or an IOU (literally “I owe you”, with kind of the same gravitas as ‘BRB’ and ‘OMG’ I hear you say?) The Preserve of Reserve The reality here is the fact that, if this is done within limits, it can actually stimulate the economy. Imagine in our story that the economic activity -- the sum total of stuff being bought and sold -- in the town was in fact to the tune of 2000 pounds of silver by value, but the actual silver in possession was only the thousand. By reusing the reserve as depicted, it’s possible to have 2000 pounds by way of those promissory notes in circulation that then facilitates the desired economic activity. Without adequate amount of money in an economy to match the productivity, productivity would decline, as we saw very vividly in Episode 023 while discussing money supply. And after all, as I’ve reiterated, ‘money’ is just the measure of value, so what’s really the difference between using some shiny metal to represent that value or a note signed by a trusted party that represents that metal that represents...? But of course life’s not that simple. First who is Steve and Bryan, or in real life, any bank to decide to multiply money in this way? In other words, as said in my introductory quip, to literally ‘make’ money? Isn’t it still on some level someone creating money out of thin air? (I can’t decide whether to make a rabbit hole or a hat-rabbit analogy here!) What privileges to such banks get by doing this? Surely when this trend first emerged, people were more than happy to substitute carrying sacks of gold and silver in exchange for those notes which was easier to hide and especially carry around. That’s why it’s persisted despite such questions. And we in the current day have taken it even further, by entrusting small pulses of electricity to move data on a spreadsheet on some central computer by waving a piece of electromagnetized plastic with a satisfying beep? In other words we have exchanged frail paper currency for even less tangible current! So yes, as I’ve also reiterated, it all depends on trust. We trust that those digital pulses or the ink on paper with that promise mean something, that they represent the stated value of money. And what happens when there’s even the smallest fissure in that trust, when someone suspects the vault has less silver than the notes floating around? And when people, all the people with those notes, then rush to the bank to get their silver back? That’s a juicy topic for another day! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * Seeeking Symmetry, Finding Balance, Making Harmony - on the origins of the early modern banking system This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com

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Exploring innovation, progress and achievement: a first-principles approach to everything that matters; combining history, epistemology, economics, anthropology, geopolitics, finance, philology, etymology and more... for, life is short, knowledge forever. ashstuart.substack.com

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